Proposal for special taxation rules for Carried Interest

On January 28, 2025, a proposal for new legislation on how owners in private equity firms should be taxed for income derived from carried interest, was published. The proposal intends to codify that such income should be taxed according to the special rules for closely held companies in Chapter 57 of the Income Tax Act (3:12 rules) and not as salary income.

The issue of how individuals working in the private equity sector should be taxed for returns derived from carried interest has been the subject of disputes between the Swedish Tax Agency and the private equity industry for more than 15 years. The main question has been whether Swedish individuals should be taxed as salary for the relevant income or whether taxation should instead occur in the same manner as for other capital income (if applicable, in accordance with the 3:12 rules).
There are significant differences between salary taxation and taxation according to the 3:12 rules. Taxation as salary triggers social security charges (31.42 percent on the full carried interest for the Swedish employer) and is taxable as ordinary income for the individual at a progressive tax rate up to c. 55 percent. Taxation under the closely held company rules is on the other hand not subject to social security charges for the employer and for the individual taxed at the rates applicable for salary income on returns up to an annually revised threshold (currently 7.2 MSEK) and as capital income (flat tax rate of 30 percent) on returns exceeding that.

Although the Supreme Administrative Court has not explicitly taken a position on how carried interest should be taxed, the administrative courts of appeal, as we understand it, have found that taxation should occur according to the 3:12 rules when these have been deemed applicable.
However, the long-standing disputes have created significant uncertainty in the industry, and Finance Minister Elisabeth Svantesson has on several occasions expressed the need for legislation to create clear tax rules for both private equity firms and their employees. In August 2024, an investigation was commissioned to review the taxation of carried interest and to develop proposals for such legislation.

The investigation proposal

On January 28, 2025, the investigation presented its conclusions in a report to the Ministry of Finance.

The proposal in brief is as follows:

• Individuals who, due to their work, are entitled to a special profit share (carried interest) from an alternative investment fund should be covered by the 3:12 rules. This is achieved, among other things, by considering a shareholder in a company to be significantly active in the company if it directly or indirectly has the right to profit from an alternative investment fund (as defined in Chapter 1, Section 2 of the Alternative Investment Funds Act), the right to profit more than insignificantly exceeds the company's share of committed capital, and the possibility of receiving these incomes is related to the individual's work.
• The so-called outsider rule in Chapter 57, Section 5 of the Income Tax Act should not apply to individuals whose shares are covered by the 3:12 rules as described above.
• It is proposed that the quarantine period during which the assessment of whether shares are covered by the 3:12 rules be extended from the current 5 years to 10 years.
• Certain limitations on the ability to include compensation to employees in subsidiaries of the fund when calculating the so-called salary base are introduced.

Primarily, it is proposed that the proposal be financed through increased taxes on alcohol and tobacco. To the extent that additional financing is necessary, the level up to which a carry distribution is taxed at the same rate as salary is increased to a yearly-revised amount of approximately 12.1 MSEK (as opposed to the current amount of 7.2 MSEK).

What happens now?

The investigation proposes that the new provisions should come into force on January 1, 2026, which coincides with the time when the adjusted 3:12 rules presented in June 2024 are proposed to take effect.

The proposal for new rules will now be prepared within the Ministry of Finance. If the government proceeds with the proposal, the next step is to send it for consultation to relevant parties. Normally, the consultation period is three months, but shorter periods can occur. Thereafter, a legislative referral is prepared where input from the consultation period is considered. After the review by the Council on Legislation, a bill is submitted to the parliament.

Brief comment

Given the uncertainty that the aforementioned processes have created, it is positive that the investigation proposes to codify the legal position that many have already perceived as prevailing, namely that carried interest should be taxed according to the 3:12 rules. At the same time, a number of restrictions are introduced in relation to the ordinary 3:12 rules, such as extended quarantine periods, increased caps, and limited possibilities to take underlying salary basis into account, which for some individuals may have a negative effect. These proposed adjustments apply only to owners covered by the 3:12 rules due to holding carried interest and thus not to other closely held company partners.

At PwC, we are now analyzing the proposal and its consequences in more detail and are of course available to discuss its potential impact both for individuals and private equity houses.